Have you seen the latest article on Yahoo! Finance? I recently read “The Millionaire’s Retirement Plan,” where the author explains that to stay on track for retirement, 25 year olds should save $200 a month, 35 year olds $400 a month, 45 year olds $450 a month, and 55 year olds $600 a month until retirement.
I first got into personal finance by reading Yahoo! Finance articles a few years ago. Since then, they have added some great writers and started a Financially Fit section, which I think it pretty cool. It gives everything from tips on how to lower your cellphone bill to four ways to all sorts of retirement advice. So it holds a special place in my heart, but this article was way off base with me.
Sure, as you make more money, you are able to save more, but $200 a month seems low for a 25 year old. That comes out to just $2,400 a year.
Ideally, I’d tell everyone to flip this plan on it’s head and reverse the savings patterns. By investing $600 a month as a 25 year old, $450 a month as a 35 year old, $400 a month as a 45 year old, and $200 a month as a 55 year old, you’d be almost twice as rich at age 65. That’s what I’d do (and what I am actually doing), but there’s one glaring mistake about their plan.
It doesn’t take advantage of time!
A smarter idea? Max out your Roth IRA when you are young. Invest $5,000 a year. That’s a little over $400 a month. Sure, for some people it would require diligence, but the benefits are tremendous. If you made this change for ten years (and then followed their plan for the next 30 years), you’d be over $400,000 richer.
That’s right. Invest $2,600 extra for 10 years, and you’ll get $400,000. Do I sound like an infomercial? It almost sounds too good to be true.
Or, you can think about it this way. By investing under my plan, you’ll be able to retire on the same amount of money 4 years earlier. Pretty sweet, right?
This article completely misses the time value of money factor. Investing when you’re young is so much more valuable than if you wait until you’re older.
Yes, you’ll make more money when you’re 35 or 45, but you’ll also have a ton of responsibilities. You’ll be paying for a house, kids, schooling, and tons of things you never planned for. When you’re young, you’ve got an apartment, maybe a car, and some extra spending money, that’s it!
If you make it a priority to save, you’ll be way ahead of the game! I won’t talk to the fact that a million is becoming harder to retire on.
Readers, do you think $200 a month is enough? Should we flip this thing on it’s head?